22 November 2023
HICL Infrastructure PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
This announcement contains Inside Information.
The Board of HICL Infrastructure PLC (“HICL”, or the “Company”) announces Interim Results for the Company for the six months ended 30 September 2023. The Interim Report is available at the following link: https://www.hicl.com/InterimReport2023
Highlights for the six months ended 30 September 2023
| · | HICL’s portfolio performed in line with expectations during the period, delivering an underlying return1 of 8.2% (30 September 2022: 13.0%), ahead of the expected return of 7.2% as at 31 March 2023, before macroeconomic adjustments to the discount rate, inflation and interest rates. | |
| · | A decrease of 5.5p in Net Asset Value to 159.4p (31 March 2023: 164.9p), reflecting the increase of the portfolio’s weighted average discount rate from 7.2% to 8.0%. | |
| o | The increase in the discount rate reflects increased long-term government bond yields balanced by the Company’s own recent cross-sector and cross-geography transactions, all sold at or above their respective valuation at 31 March 2023. | |
| · | Transaction activity in the period totalled £532m, demonstrating our active approach to asset rotation and portfolio enhancement: | |
| o | £208m of acquisitions across two investments: Altitude Infra (fibre, France) and Hornsea II OFTO (electricity transmission, UK). | |
| o | £324m of divestments, spanning a portfolio sale of four UK PPP projects and half of HICL’s investment in the Hornsea II OFTO (UK); a partial disposal of the Northwest Parkway toll road (US); the sale of Bradford BSF Schools PPP, phases 1 and 2 (UK); and the sale of University of Sheffield accommodation (UK). All divestments were made at or above their respective valuation at 31 March 2023. | |
| · | Disposal proceeds will be used to reduce floating rate debt exposure, in line with the Company’s disciplined capital allocation approach. On completion of disposals, the RCF is expected to be c.£115m drawn, bringing fund gearing down to be c.10%. | |
| · | Contractual inflation linkage embedded in HICL’s assets supported an increase in cash generation, with dividend cash cover excluding profits on disposals improving to 1.05x over the period (September 2022: 1.03x). Including profits on disposals cash cover is 1.35x (September 2022: 1.58x). | |
| · | The Board reaffirms that HICL remains on track to deliver its target dividend of 8.25p per share for the financial year ending 31 March 20242. | |
| · | The Board reiterates its dividend guidance of 8.25p per share for the year ending 31 March 20252, reflecting an appropriate balance between delivering short-term yield and enhancing HICL’s long-term earnings base, particularly as its PPP concessions approach maturity. | |
| · | The Board’s priority remains disciplined capital management, in particular, the reduction in short-term floating debt. The bar for new investments remains very high, informed by the cost of debt and the relative attractiveness of buying back shares. | |
1. Performance of the portfolio relative to the opening weighted average discount rate
2. This is a target only and not a profit forecast. There can be no assurance that this target will be met
Summary Financial Results
(On an Investment Basis)
| for the six months to | 30 September 2023 | 30 September 2022 |
| Income1 | £10.9m | £125.8m |
| Total Return2 | £(27.6)m | £102.6m |
| (Loss) / Earnings per share (“EPS”) | (1.4p) | 5.2p |
| Target dividend per share for the year | 8.25p | 8.25p |
| 1. Income was £(24.7)m on an IFRS Basis (2022: £104.5m)2. Total Return was £(27.6)m on an IFRS Basis (2022: £102.6m) | ||
| Net Asset Value | 30 September 2023 | 31 March 2023 |
| NAV per share | 159.4p | 164.9p |
| Interim Dividend | 2.06p | 2.07p |
| NAV per share after deducting interim dividend | 157.3p | 162.8p |
Mike Bane, Chair of HICL, said:
“The Board and I are pleased with the active management of HICL’s portfolio and the solid operating result against a difficult market backdrop. Continued progress on strategic asset rotation has served to improve portfolio composition, while supporting the Company’s Net Asset Value. This transaction activity, which has been across geographies, sectors and counterparties, gives the Board a high level of confidence in HICL’s NAV and reinforces the belief that the Company’s shares have been materially oversold by public markets.”
Edward Hunt, Head of Core Income Funds at InfraRed Capital Partners, HICL’s Investment Manager added:
“HICL continues to withstand the volatile macro environment, with solid underlying asset performance and resilient asset valuations as demonstrated by our asset disposals during the period which have sold at a premium. The focus on strong balance sheet management informs HICL’s proactive capital allocation strategy, with disposal proceeds used to materially reduce the RCF. The Company’s strong track-record of accretive asset rotation stands it in good stead to self-fund its future investment activities, as required, and continue to enhance HICL’s investment proposition for shareholders.”
Chair’s Statement
HICL’s results for the first half of the year demonstrate strategic asset rotation, improving portfolio composition and validating the Company’s Net Asset Value.
In a period dominated by significant structural shifts in the macroeconomic environment, HICL’s core infrastructure assets continued to perform in line with expectations. The Company’s diversified portfolio benefits from predictable long-term cash flows which are positively correlated to inflation and insulated in large part from economic and financial market volatility. These defensive attributes are a key attraction of the core infrastructure asset class and underpin the durability of HICL’s long-term investment proposition.
Given market conditions, the Board and Investment Manager have been particularly focused on the active management of HICL’s portfolio and balance sheet. During the period, over £320m of asset sales have been announced at or above their respective valuation at 31 March 2023. These sales improve portfolio composition, validate the Company’s Net Asset Value (“NAV”) and, on completion, reduce exposure to floating rate debt. This exposure was also reduced in the period by completing a £150m private placement and capping £200m of floating interest rate exposure on the Revolving Credit Facility (“RCF”).
Despite the solid operating performance of the portfolio and transaction evidence for the intrinsic value of HICL’s assets, the higher interest rate environment has severely impacted the Company’s share price in the period, with HICL trading at a significant discount to NAV. The Board believes that there is a significant disconnect between the value ascribed to the Company’s portfolio by public markets, compared to the valuations consistently demonstrated in private markets through the Company’s asset sales. This transaction activity, which has been across geographies, sectors and counterparties, gives the Board a high level of conviction in the reported NAV and reinforces the belief that the Company’s shares have been materially oversold by public markets. Compared with fixed income products, HICL offers higher nominal returns, with inflation protection and the potential for capital growth and outperformance. The share price at 30 September 2023 implies a long-term expected return from the portfolio of 8.9% p.a. net of costs1. The Board believes this represents compelling risk-adjusted value.
Financial performance
The Company’s NAV at 30 September 2023 was 159.4p (March 2023: 164.9p). The loss per share was (1.4)p (September 2022: earnings of 5.2p). Total Shareholder Return (“TSR”)2 on an annualised basis was (1.7)% (September 2022: 6.7%) and the underlying Annualised Return from the portfolio was 8.2%3 (September 2022: 13.0%), which exceeds the Company’s weighted
average discount rate of 7.2% as at 31 March 2023.
The movement in the NAV per share from 164.9p at 31 March 2023 to 159.4p at 30 September 2023 was primarily driven by increases in discount rates. The 80bps increase in the weighted average discount rate to 8.0% reflects higher interest rates across HICL’s key geographies and was partially offset by higher inflation (both forecast and actual) and by increases in deposit rates (see full updated assumptions on page 13 of the full Interim Report linked above).
A detailed explanation of the factors affecting the valuation is set out in the Valuation of the Portfolio section starting on page 11 of the full Interim Report linked above.
Accretive investment activity
Strategic asset rotation has consistently been a key driver of shareholder value for HICL, with 25 asset disposals amounting to over £830m since IPO. These have contributed over 7.5p to NAV and provide an important source of capital outside capital markets.
Over the last 18 months, HICL’s portfolio has significantly evolved with over £745m4 of new high-quality core infrastructure investments, funded in a large part through over £430m5 of disposals. This active management has improved portfolio composition, increased diversification and delivered shareholder value despite challenging equity market conditions.
More information on these transactions can be found in the Investment Manager’s Report, on page 6 of the full Interim Report linked above.
Financing
On completion of disposals announced in the period, the Company’s £650m RCF is expected to be c.£115m drawn, down from £494m at its peak in April 2023, with gearing reduced from 16% to 10%.
In addition to disposals, the Manager executed on several initiatives to further reduce floating interest rate exposure in the period. Further information is given on page 6 of the full Interim Report linked above.
Dividend guidance
The Board is pleased to re-affirm that HICL remains on track to deliver its target dividend of 8.25p per share for the financial year ending 31 March 2024, which is expected to be cash covered. The Board also reiterates its dividend guidance of 8.25p per share for the year ending 31 March 2025.
The Board notes that the contractual inflation linkage embedded across HICL’s assets, is now beginning to flow through to uplifted cash flows, having already been recognised in the NAV. This has contributed to the increase seen in dividend cash cover to 1.05x (March 2023: 1.03x) and the Board expects this upward trend to continue.
Sustainability leadership
As part of the Board’s commitment to continuous improvement, a sustainability investor perception survey was commissioned during the period to allow the Board to better evaluate HICL’s performance in this critical area. Many of HICL’s investors provided input on HICL’s approach to sustainability strategy and disclosure. This valuable feedback will feed directly into the 2024 Sustainability Report, ensuring HICL’s sustainability disclosures continue to improve alongside increasing Net Zero data collection at the portfolio level. I would like to personally thank those investors who participated.
Outlook
Against a challenging backdrop of unpredictable macroeconomic conditions, the Board remains highly focused on robust governance procedures. This includes oversight of the Company’s transactions, capital allocation and processes, as well proactive engagement with investors.
HICL’s portfolio offers investors a highly defensive set of cash flows and a resilient NAV which has been consistently validated through third-party transactions. The Board believes that the current disconnect in pricing between public and private markets for high-quality core infrastructure assets represents a unique opportunity for investors with a long-term mindset: a return of the Company’s share price to NAV would represent a 29% return before dividends6.
In this environment the Board remains focused on appropriate capital allocation. The bar for new acquisitions is suitably high, informed by alternative uses of capital such as reducing the Company’s floating rate debt or buying back shares. Additionally, market volatility has historically offered attractive investment opportunities for those companies that have maintained optionality through active balance sheet management. HICL’s investors should expect the focus on self-funded and accretive portfolio rotation to continue, with live disposal activity at the time of publication. In the longer term, the megatrends of decarbonisation and digitalisation are largely unaffected by short-term market volatility and continue to drive growth in the core infrastructure sector. This provides a compelling strategic backdrop for the Company to execute its long-term strategy.
Mike Bane, Chair
21 November 2023